Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report and in our
Annual Report on Form 10-K for the year ended December 31, 2011. Historical
results and percentage relationships set forth in the condensed consolidated
financial statements, including trends which might appear, should not be taken
as necessarily indicative of future operations. The following discussion and
other parts of this Quarterly Report on Form 10-Q may also contain
forward-looking statements based on current judgments and current knowledge of
management, which are subject to certain risks, trends and uncertainties that
could cause actual results to differ materially from those indicated in such
forward-looking statements. Accordingly, readers are cautioned not to place
undue reliance on forward-looking statements. Investors are cautioned that our
forward-looking statements involve risks and uncertainty, including without
limitation, economic conditions in the United States, disruptions in the debt
markets, economic conditions in the markets in which we own properties, risks of
a lessening of demand for the types of real estate owned by us, uncertainties
relating to fiscal policy, changes in government regulations and regulatory
uncertainty, geopolitical events, and expenditures that cannot be anticipated
such as utility rate and usage increases, unanticipated repairs, additional
staffing, insurance increases and real estate tax valuation reassessments. See
Item 1A. "Risk Factors" below. Although we believe the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We may not update any
of the forward-looking statements after the date this Quarterly Report on
Form 10-Q is filed to conform them to actual results or to changes in our
expectations that occur after such date, other than as required by law.

The main factor that affects our real estate operations is the broad economic
market conditions in the United States. These market conditions affect the
occupancy levels and the rent levels on both a national and local level. We
have no influence on broader economic/market conditions. We look to acquire
and/or develop quality properties in good locations in order to lessen the
impact of downturns in the market and to take advantage of upturns when they
occur.

Critical Accounting Policies

We have certain critical accounting policies that are subject to judgments and
estimates by our management and uncertainties of outcome that affect the
application of these policies. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under the
circumstances. On an on-going basis, we evaluate our estimates. In the event
estimates or assumptions prove to be different from actual results, adjustments
are made in subsequent periods to reflect more current information. The
accounting policies that we believe are most critical to the understanding of
our financial position and results of operations, and that require significant
management estimates and judgments, are discussed in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2011.

Critical accounting policies are those that have the most impact on the
reporting of our financial condition and results of operations and those
requiring significant judgments and estimates. We believe that our judgments
and assessments are consistently applied and produce financial information that
fairly presents our results of operations. No changes to our critical
accounting policies have occurred since the filing of our Annual Report on
Form 10-K for the year ended December 31, 2011.

Trends and Uncertainties

Economic Conditions

The economy in the United States is continuing to experience a period of limited
economic growth, including high levels of unemployment, which directly affects
the demand for office space, our primary income producing asset. The broad
economic market conditions in the United States are affected by numerous
factors, including but not limited to, inflation and employment levels, energy
prices, slow economic growth and/or recessionary concerns, uncertainty about
government fiscal policy, changes in currency exchange rates, geopolitical
events, the regulatory environment and the availability of debt and interest
rate fluctuations. We believe that recent economic conditions in the United
States have negatively affected our business by, among other factors,
contributing to a decline in occupancy and rental rates in our real estate
portfolio in 2009 and 2010. Although occupancy levels in our real estate
portfolio generally improved in 2011 and the first nine months of 2012, future
economic factors may negatively affect real estate values, occupancy levels and
property income. At this time, we cannot predict the extent or duration of any
negative impact that the current state of the United States economy will have on
our business.

Real Estate Operations

Leasing

Our real estate portfolio was approximately 89.9% leased (including an asset
held for sale) as of September 30, 2012 and approximately 88.7% leased as of
December 31, 2011. During the nine months ended September 30, 2012, we leased
521,574 square feet of office space, of which approximately 395,667square feet
were with existing tenants, at a weighted average term of 4.3 years. On
average, tenant improvements for such leases were $8.30 per square foot, lease
commissions were $3.69 per square foot and rent concessions were approximately
two months of free rent. GAAP base rents under such leases were $22.06 per
square foot, or 1.4% higher than average rents in the respective properties as
applicable compared to the prior period.

As of September 30, 2012, approximately 1.2% of the square footage in our
portfolio is scheduled to expire during the remainder of 2012, and approximately
5.9% is scheduled to expire during 2013. Our property portfolio is primarily
suburban office assets. Most of the rental/leasing markets where our properties
are located remained stable during the third quarter both in terms of occupancy
and rental rate levels. Within this environment, we continue to make steady
leasing progress and anticipate higher year-end occupancy. Our property
portfolio has relatively modest lease expirations over the next two years and,
along with our improving occupancy levels, should allow overall tenant
improvement expenditures and leasing costs to moderate in relation to the level
of rental revenues being achieved.

While we cannot generally predict when existing vacancy in our real estate
portfolio will be leased or if existing tenants with expiring leases will renew
their leases or what the terms and conditions of the lease renewals will be, we
expect to renew or sign new leases at then-current market rates for locations in
which the buildings are located, which in many cases may be below the expiring
rates. Also, even as the economy recovers, we believe the potential for any of
our tenants to default on its lease or to seek the protection of bankruptcy
still exists. If any of our tenants defaults on its lease, we may experience
delays in enforcing our rights as a landlord and may incur substantial costs in
protecting our investment. In addition, at any time, a tenant of one of our
properties may seek the protection of bankruptcy laws, which could result in the
rejection and termination of such tenant's lease and thereby cause a reduction
in cash available for distribution to our stockholders.

Real Estate Acquisitions and Investments

On July 5, 2012, we made and funded a Sponsored REIT Loan in the form of a first
mortgage loan in the principal amount of $33.0 million to an entity that is a
wholly-owned by a subsidiary of a Sponsored REIT, FSP Energy Tower I Corp. On
July 31, 2012, we acquired an office property with approximately 387,000 square
feet for approximately $52.8 million in Atlanta, Georgia. We also made one
additional real estate investment in the first quarter of 2012 for a total
capital contribution of $30 million. The investment was made as an additional
funding amount to our original $76.2 million two-year bridge loan on a CBD
office/retail property located in Minneapolis, Minnesota. The total loan
provided to this property was $106.2 million and was secured by a first
mortgage. On July 27, 2012 this loan was repaid in its entirety and we received
an exit fee in the amount of $0.5 million. The property is owned by FSP 50
South Tenth Street Corp., which is one of our Sponsored REITs. During 2011, we
acquired five properties directly into our portfolio with an aggregate of
approximately 994,000 rentable square feet at an aggregate purchase price of
approximately $214 million. The results of operations for each of the acquired
properties are included in our operating results as of their respective purchase
dates. Increases in revenues and expenses for the three and nine months ended
September 30, 2012 compared to the three and nine months ended September 30,
2011 are primarily a result of the timing of these property acquisitions and
subsequent contribution of these acquired properties as well as our mortgage
investments. On October 10, 2012, we announced entering into an agreement to
purchase a property. The property is located at 10370 and 10350 Richmond
Avenue, Houston, Texas and consists of two, 14-story, multi-tenant office
buildings containing an aggregate of approximately 629,000 rentable square feet
of space and a parking garage located on approximately 6.5 acres of land. The
purchase price is approximately $154.8 million and is subject to customary
conditions and termination rights for transactions of this type. We anticipate
that the closing will take place on or about November 1, 2012. Additional
potential real estate investment opportunities are actively being explored and
we would anticipate further real estate investments in the coming months.

Discontinued Operations and Property Dispositions

We include investment banking activities and properties sold or held for sale as
discontinued operations.

Investment Banking

Previously we operated in the investment banking segment, and in December 2011,
we discontinued those activities. The investment banking segment involved the
structuring of real estate investments and broker/dealer services that included
the organization of Sponsored REITs, the acquisition and development of real
estate on behalf of Sponsored REITs and the raising of capital to equitize the
Sponsored REITs through sale of preferred stock in private placements. On
December 15, 2011, we announced that our broker/dealer subsidiary, FSP
Investments LLC, would no longer sponsor the syndication of shares of preferred
stock in newly-formed Sponsored REITs.

FSP Investments LLC will, however, continue to provide investor services to
existing Sponsored REITs, which are not a significant activity, and has the
capability to sponsor the syndication of any additional shares of preferred
stock in existing Sponsored REITs. Our decision to no longer sponsor the
syndication of shares of preferred stock in newly-formed Sponsored REITs was
made after judging the potential for meaningful future profit contribution to
our earnings from such syndications to be limited. Our investment banking
segment had been marginal in its profit contribution over the last four years
and we believed time and resources would be more productively deployed
elsewhere.

Property Dispositions and Asset Held For Sale

During the three months ended September 30, 2012, we reached a decision to
classify its office property located in Southfield, Michigan as an asset held
for sale. In evaluating the Southfield, Michigan property, management
considered various subjective factors, including the time, cost and likelihood
of successfully leasing the property, the affect of the property's results on
its unencumbered asset value, which is part of the leverage ratio used to
calculate interest rates in the 2012 Credit Facility and future capital costs to
upgrade and reposition the multi-tenant property and to lease up the building,
recent leasing and economic activity in the local area, and offers to purchase
the property. We concluded that selling the property was the more prudent
decision and outweighed the potential future benefit of continuing to hold the
property. The property is expected to sell within one year at a loss, which was
recorded as a provision for loss on a property held for sale of $14.3 million
net of applicable income taxes and was classified as an asset held for sale at
September 30, 2012.

We sold an industrial property located in Savage, Maryland on June 24, 2011 and
in 2010 reached an agreement to sell an office property, located in Falls
Church, Virginia, which was sold on January 21, 2011. Both properties were sold
at gains and were classified as discontinued for all periods presented.

We will continue to evaluate our portfolio, and in the future may decide to
dispose of additional properties from time to time in the ordinary course of
business. We believe that the current property sales environment remains
challenged relative to both liquidity and pricing. However, we also believe
that we are witnessing improving pricing and liquidity in certain markets,
extending a trend that we believe began in the second half of 2009. We believe
that both improving office property fundamentals as well as plentiful and
attractive financing availability will likely be required to broadly improve the
marketplace for property dispositions. As an important part of our total return
strategy, we intend to be active in property dispositions when we believe that
market conditions warrant such activity and, as a consequence, we continue to
consider some of our properties for possible disposition.

The following table shows results for the three months ended September 30, 2012
and 2011:

Comparison of the three months ended September 30, 2012 to the three months
ended September 30, 2011

Revenues

Total revenues increased by $7.3 million to $41.8 million for the quarter ended
September 30, 2012, as compared to the quarter ended September 30, 2011. The
increase was primarily a result of:

o An increase in rental revenue of approximately $4.9 million arising
primarily from the acquisition of a property in September 2011, a property
acquired in October 2011 and a property acquired in July 2012, which were
included in the quarter ended September 30, 2012; and to a lesser extent,
leasing, which raised occupancy approximately 1.7% in the continuing real estate
portfolio at September 30, 2012 compared to September 30, 2011.

o A $2.4 million increase in interest income from loans to Sponsored REITs,
which was primarily a result of a larger average loan receivable balance and a
higher interest rate charged during the three months ended September 30, 2012,
as compared to the three months ended September 30, 2011.

Expenses

Total expenses increased by $5.2 million to $36.3 million for the quarter ended
September 30, 2012, as compared to $31.1 million for the quarter ended
September 30, 2011. The increase was primarily a result of:

o An increase in real estate operating expenses and real estate taxes and
insurance of approximately $1.5 million, and depreciation and amortization of
$1.4 million, which were primarily from the acquisition of a property in late
September 2011, a property acquired in October 2011 and a property acquired in
July 2012, which were included in the quarter ended September 30, 2012.

o An increase to interest expense of approximately $0.8 million to $4.2
million during the three months ended September 30, 2012 compared to the same
period in 2011. The increase was attributable to a higher amount of debt
outstanding for the second quarter of 2012 compared to the second quarter of
2011, and to a lesser extent the acceleration of some amortization of deferred
financing costs related to the 2012 Credit Facility.

o An increase in selling, general and administrative expenses of $1.5
million, which was primarily the result of a $0.8 million increase in
compensation accruals in the third quarter of 2012 compared to the same period
in 2011, and realignment of personnel and resources in our real estate business
following a decision to discontinue our investment banking activities in
December 2011. We had 35 and 44 employees as of September 30, 2012 and 2011,
respectively, at our headquarters in Wakefield, Massachusetts.

Equity in earnings of non-consolidated REITs

Equity in earnings from non-consolidated REITs decreased approximately $0.4
million to $0.2 million during the three months ended September 30, 2012
compared to $0.6 million for the same period in 2011. The decrease was
primarily because our equity in income of our investment in East Wacker
decreased $0.2 million during the three months ended September 30, 2012 compared
to the same period in 2011; and we had no syndications in process during the
three months ended September 30, 2012 from which equity in income of
syndications is derived, compared to one syndication in process during the third
quarter of 2011.

Taxes on income

Included in income taxes is the Revised Texas Franchise Tax, which is a tax on
revenues from Texas properties that increased $13,000 for the three months ended
September 30, 2012 compared to the three months ended September 30, 2011.

Income from continuing operations

Income from continuing operations for the three months ended September 30, 2012
was $5.6 million compared to $3.9 million for the three months ended
September 30, 2011, for the reasons described above.

Discontinued operations and provision for sale of property

The sale of properties from our portfolio results in a reclassification of real
estate income from those properties for all periods presented to discontinued
operations. Gains or losses on those sales or provisions for losses on sales
are included in discontinued operations.

During the three months ended September 30, 2012, we reached a decision to
classify its office property located in Southfield, Michigan as an asset held
for sale. In evaluating the Southfield, Michigan property, management
considered various subjective factors, including the time, cost and likelihood
of successfully leasing the property, the affect of the property's results on
its unencumbered asset value, which is part of the leverage ratio used to
calculate interest rates in the 2012 Credit Facility and future capital costs to
upgrade and reposition the multi-tenant property and to lease up the building,
recent leasing and economic activity in the local area, and offers to purchase
the property. We concluded that selling the property was the more prudent
decision and outweighed the potential future benefit of continuing to hold the
property. The property is expected to sell within one year at a loss, which was
recorded as a provision for loss on a property held for sale of $14.3 million
net of applicable income taxes and was classified as an asset held for sale at
September 30, 2012. The operations of the property generated losses, which are
included in income (loss) from discontinued operations of $0.3 million during
the three months ended September 30, 2012 and $0.4 million during the three
months ended September 30, 2011. In addition, in December 2011, we discontinued
our investment banking segment. The loss derived from the investment bank was
$0.1 million for the three months ended September 30, 2011.

Net income (loss)

Net loss for the three months ended September 30, 2012 was $9.0 million compared
to net income of $3.3 million for the three months ended September 30, 2011, for
the reasons described above.

The following table shows results for the nine months ended September 30, 2012
and 2011:

Comparison of the nine months ended September 30, 2012 to the nine months ended
September 30, 2011

Revenues

Total revenues increased by $18.9 million to $119.4 million for the nine months
ended September 30, 2012, as compared to the nine months ended September 30,
2011. The increase was primarily a result of:

o An increase in rental revenue of approximately $12.7 million arising
primarily from the acquisitions of three properties in March 2011, a property in
September 2011, a property in October 2011 and a property in July 2012, which
were included in the nine months ended September 30, 2012, as compared to a
partial period for the three properties acquired in March 2011 and a property
acquired in September 2011 that were included in the nine months ended
September 30, 2011; and to a lesser extent, leasing, which raised occupancy
approximately 1.7% in the continuing real estate portfolio at September 30, 2012
compared to September 30, 2011.

o A $6.2 million increase in interest income from loans to Sponsored REITs,
which was primarily a result of a larger average loan receivable balance and a
higher interest rate charged during the nine months ended September 30, 2012, as
compared to the nine months ended September 30, 2011.

Expenses

Total expenses increased by approximately $13.6 million to $102.9 million for
the nine months ended September 30, 2012, as compared to $89.3 million for the
nine months ended September 30, 2011. The increase was primarily a result of:

o An increase in real estate operating expenses and real estate taxes and
insurance of approximately $3.5 million, and depreciation and amortization of
$5.0 million, which were primarily from the acquisitions of three properties in
March 2011, a property in September 2011, a property in October 2011 and a
property in July 2012, which were included in the nine months ended
September 30, 2012, as compared to a partial period for the three properties
acquired in March 2011 and a property acquired in September 2011 that were
included in the nine months ended September 30, 2011.

o An increase to interest expense of approximately $2.5 million to $11.9
million during the nine months ended September 30, 2012 compared to $9.4 million
for the same period in 2011. The increase was attributable to a higher amount
of debt outstanding, and to a lesser extent the acceleration of some
amortization of deferred financing costs related to the 2012 Credit Facility.

o An increase in selling, general and administrative expenses of $2.6
million, which was primarily the result of a $0.9 million increase in
compensation accruals during the nine months ended September 30, 2012 compared
. . .